This page, which is presently only a sketch, addresses perceptions about disparities in mortgage rejection rates. The articles listed below that specifically address such issue were written some time ago. But this page was created because of recent attention given to a large settlement between the Department of Justice and the Bank of America’s Countrywide Financial Unit, which, according to the New York Times, involved a claim that “the odds of a minority applicant being steered into [a subprime loan] were more than twice as high as those for a non-Hispanic white borrower with a similar credit rating.”[i] This page is related to the Scanlan’s Rule page of the site, which discusses the statistical pattern whereby the rarer an outcome the greater tends to be the relative difference in experiencing it and the smaller tends to be the relative difference in avoiding it. That and related patterns by which standard measures of differences between outcome rates tend to be affected by the overall prevalence of an outcome are also addressed on the Measuring Health Disparities, Mortality and Survival, Measures of Association pages. Section 5 of the Adjustment Issues sub-page of the Vignettes pages address a particular nuance of one the studies discussed in a number of the articles listed below.
Articles specifically addressing Credit Discrimination issues include (a) “Race and Mortality” (Society, Jan.-Feb. 2000); (b) “Confusion over Credit Discrimination” (unpublished,[ii] 1997); (c) "Both Sides Misuse Data in the Credit Discrimination Debate," American Banker (July 22, 1998); (d) "Responsive Banks Hurt By Improper Data Interpretation," Montgomery Journal (May 5, 1998); (e) "Perils of Using Statistics to Show Presence or Absence of Loan Bias," American Banker (Dec., 1997); (f) "Statistical Anomaly Penalizes Fair-Lending Effort," American Banker (Nov. 18, 1996); (g) “When Statistics Lie” (Legal Times, Jan. 1 1996), and The Perils of Provocative Statistics (Public Interest, Winter 1991).
Key points of these items, which points may be eventually elaborated upon here, are the discussed below, along with some recent developments.
1. Implications of Relaxing Lending Criteria.
There existed considerable sentiment that observed mortgage rejection rate disparities occurred not because of (or at least not so much because) of intentional discrimination but because standard lending criteria tended to disproportionately disadvantage minorities. Thus, banks were encouraged to relax those criteria. But the relaxing of criteria, while reducing disparities in approval rates, tends to increase disparities in rejection rates. Because few people understand this, however, banks that were most responsive to the encouragement to relax lending criteria became especially vulnerable to being singled out for litigation due to their large rejection rate disparities (as in the case of the suit against NationsBank discussed in the 1996 Legal Times article and the 1997 unpublished piece).
2. Underadjustment Issue.
Anyone with the least understanding of normal distributions will recognize that efforts to adjust in groups’ outcome rates for differences in characteristics associated with the outcome will invariably fail to fully address the role of those difference, since the group that on average has lower qualifications relating to securing an outcome will be disproportionately represented within the lower reaches of each adjustment category. Thus, within high, medium, or low income categories (or even refinements on these categorizations), the average incomes of minorities will tend to be lower than the average income of whites. And of course the differences in wealth of minorities and whites earning the same income are well-documented. And for every credit rating, however refined, the financial circumstances of minorities will on average be somewhat weaker than that of white. But those who recognize the tendency toward underadjustment are often inclined to think that, even if there is some underadjustment, unaccounted for differences could not be great enough to explain what are perceived to be very large residual disparities in rates of experiencing an adverse outcome. Such thinking, however, fails to recognize that seemingly large relative differences in rare outcomes can be explained by seemingly small differences in average (and average unaccounted for) qualifications.
3. Implications of Large Relative Differences in Rejection Rates among High-Income Groups.
During the 1990s it was asserted that claims that lending disparities could be explained by income differences were refuted by the fact that rejection rate disparities were found to be larger in higher-income categories than lower-income categories. Even if, properly measured, disparities were found to be larger in higher-income categories it could have bearing on the issue of whether there existed discrimination absent a showing that the differences between the financial circumstances of the groups were the same within each income category. Even then, I am not sure I see the logical basis for the contention. More pertinent to the principal statistical issues addressed on this site, the contention is based on relative differences in rejection rates. Because rejection rates tend to be comparatively low among higher-income groups, relative differences in rejection rates tend to be high (though relative differences in approval rates tend to be low) among such groups.
4. Higher Default Rates among Minorities as Putative Evidence of the Absence of Discrimination
During the 1990s, as discussed in the 1997 unpublished piece and the 1998 American Banker piece, a number of observers (including Nobelist Gary Becker) argued that the higher default rates among minority borrowers tended to refute claims of widespread credit discrimination. Those observers found in the higher minority default rates evidence that minorities had in fact been subjected to lower standards. (That same reasoning underlies claims that higher qualifications of Asians admitted to universities is evidence of discrimination against Asian applicants, as discussed in the 1991 Public Interest piece). But in consequence of the same feature of normal distributions underlying points 1 through 3 above, a group that on average has weaker qualifications among applicants will tend to have weaker qualifications among those approved, even when the group has been discriminated against (as illustrated with regard to employment in Table IV of “Illusions of Job Segregation” (Public Interest, Fall 1988).
5. Recent Studies of Racial Differences in Foreclosure Rates.
Recently, in consequence of the foreclosures crisis, further attention is being given to the same sorts of disparities in defaults and foreclosures that in the 1990 led observers to regard (incorrectly, as discussed in item 4 supra) as evidence of the absence of credit discrimination.[iii] Now, however, the same disparities appear to be regarded as evidence that minorities were steered to higher risk loans. The study referenced in note iii gives much attention to the large racial disparities among higher-income groups in a manner somewhat akin to that discussed in item 2 supra but, in any case, without recognition of the statistical forces leading toward large relative difference in adverse outcomes (though small relative differences in favorable outcomes) where adverse outcomes are less common. A central point of the study is that minorities have been especially impacted by the foreclosure crisis and policies should be implemented to reduce foreclosure rates.
I have not seen data on disparities in foreclosures prior to the foreclosures crisis (though there may be such data cited by the commentators referenced in item 4). But the statistical forces described in the references mentioned at the outset are of a nature that would cause relative differences in foreclosures to be smaller (though relative differences in avoiding foreclosures to be larger) following the crisis than they were previously. Similarly, general efforts to reduce foreclosures, if successful, will tend to increase relative differences in foreclosure rates while reducing relative differences in rates of avoiding foreclosure.
[i] I do not know whether the finding in fact involved differences in odds or differences in chances, something that can sometimes make a difference. But the matter is not particularly germane to the instant topic.
[ii] Versions of this item were accepted for publication by the editors of Brookings Review and ABA Bank Compliance. But in each case publication boards concluded that the item was over the head of its readers. In the case of the latter publication, given that a key theme of the article was that banks were being unfairly singled out for litigation by enforcers who did not understand fundamental statistics, one would think that the board, assuming it understood the item, would consider it important enough to publish even if many readers might not understand it.
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